Shares of Wells Fargo & Co. (NYSE: WFC) more than doubled the performance of the S&P 500 for the week just past, but many investors and traders thought that the bank’s earnings report delivered Thursday morning was weak. The bank beat earnings per share estimates by two cents and actually beat revenue estimates as well.
Wells Fargo’s loan portfolio rose to nearly $950 billion in the first quarter, but profitability continues to suffer from low interest rates. Net interest margin fell from 2.95% a year ago to 2.90%.
Another nasty bit of news was related to the bank’s lending in the energy sector. In the first quarter Wells Fargo wrote off $204 million loans to energy companies and the percentage of the bank’s outstanding loans to the industry that are in danger of defaulting totals 57%, up from 38% sequentially. The good news is that energy companies represent only 2% of the bank’s total loan portfolio.
Analysts responded to the report somewhat differently. Piper Jaffray, for instance, cut its rating on the stock from Neutral to Underperform and cut its price target from $48 to $44. Merrill Lynch maintained a Buy rating on the stock and a $57 per share price objective. The analysts stated their rationale:
We believe that WFC has the most levers to pull to support earnings power vs. mega-cap banks. At 1.7x TBV, shares appear attractively valued to ROTE potential of 14%. Given its concentration in resi[dential] real estate, WFC is not immune to a weak consumer, but we believe we have fully reflected this in our estimates and still find valuation compelling.
Oppenheimer maintained its Perform rating and had these comments:
It seemed to us to be a bit of a messy quarter for a bank that is one of the most consistent and profitable, but we think WFC gets a “hall pass” for a quarter with choppy markets and the acquisition of GE capital assets. Net interest income (NII) was up 0.4% linked quarter but missed our expectation by $138M, and NIM fell from 2.92% to 2.90% while others had gains. This is explainable; the acquisition drove up the cost of funds by ~0.02% and management made a conscious choice to pause purchase activity in their investment book, but that is a temporary drag.
Argus also maintained its Buy rating and price target of $58 following the bank’s earnings report.
In our view, Wells Fargo continues to deliver best-in-class returns on capital, and its balance sheet is clean. Given the company’s steady earnings profile, we believe that the stock merits a premium multiple relative to its large bank peers. Wells is among the large banks that have not been required to make sizeable divestitures due to regulatory changes, and that are not facing the higher regulatory/compliance costs of multinational banks. We also believe that the acquisition of GE Capital assets provides a large-scale growth opportunity, given WFC’s asset base, at relatively low risk.
Wells Fargo closed Friday at $48.25, down 1.1% for the day in a 52-week range of $44.50 to $58.77. The consensus price target on the stock is $55.45 although the latest changes may not yet be included.
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